Analysis & Opinion

HOUSTON (Reuters) - American Electric Power, one of the country's largest coal-burning utilities, said on Thursday it plans to retire nearly one-quarter of its coal fleet and retrofit other units at a cost of as much as $8 billion to comply with proposed environmental regulations.

To meet stricter pollution limits for air, water and coal waste, AEP said it will retire 6,000 megawatts of coal-fired generation in Virginia, West Virginia and Ohio in 2014.

It also plans to upgrade or install new advanced emissions reduction equipment on another 10,100 MW, convert 1,070 MW of coal generation to 932 MW of natural gas capacity and build 1,220 MW of natural gas-fueled generation.

The Columbus, Ohio-based company, which operates utilities in 11 states serving 5 million customers, warned that costs of the proposed regulations to customers and local economies have "been vastly underestimated," especially in Midwestern states that rely heavily on coal to produce electricity.

"Because of the unrealistic compliance timelines in the EPA (the U.S. Environmental Protection Agency) proposals, we will have to prematurely shut down nearly 25 percent of our current coal-fueled generating capacity, cut hundreds of good power plant jobs, and invest billions of dollars in capital to retire, retrofit and replace coal-fueled power plants." said Michael Morris, AEP's chairman.

Duke Energy, Dominion Resources, Progress Energy, the Tennessee Valley Authority and other utilities have already identified coal units they expect to retire in the next few years.

Industry studies have indicated that between 30,000 and 70,000 MW of coal-fired generation in the U.S. may be forced to shut, depending on the final EPA rules.

While supporting the environmental benefits of the regulations, Morris said AEP electric rates could jump from 10 percent to 35 percent as its utilities comply with the rules.

AEP utilities currently own nearly 25,000 MW of coal-fueled generation, about 65 percent of AEP's 38,000-MW generating capacity. Coal's share would drop to 57 percent of AEP's total generating capacity by the end of the decade, the company said in a release.

Morris also said electric reliability in the Midwest could be affected as utilities juggle the need to retire plants, shut others to install new pollution equipment and develop new gas generation.

"The proposed timelines for compliance aren't adequate for construction of significant retrofits or replacement generation so many coal-fueled plants would be prematurely retired or idled in just a few years," Morris said.

Morris said the company will work with the EPA "with the hope that the agency will recognize the cumulative impact of the proposed rules and develop a more reasonable compliance schedule."

"With more time and flexibility, we will get to the same level of emission reductions, but it will cost our customers less," Morris said.

"You could save billions in capital costs if you had until 2020 for compliance as opposed to the timeline in the proposed rules because you can stagger the work, you won't have to idle plants or buy power on the market." said AEP spokeswoman Melissa McHenry.

However, several EPA deadlines have been set by federal courts and are beyond the EPA's control, said Mark Griffith, a managing director of Black & Veatch, a global consulting, engineering and construction company,

"Asset owners have been aware of this for several years and have been making plans," Griffith said.

"This can be done," he said. "It's a matter of spending money and managing the process. It's not simple and it's a lot of changes in the generation infrastructure in a relatively short period of time."

The EPA has four proposed rule changes. They are:

* New mercury emission limits under the Clean Air Act

* New limits on sulfur dioxide and nitrogen oxides emissions under the Clean Air Transport Rule

* Additional federal coal-ash disposal rules

* Use of cooling water towers under the Clean Water Act.

(Reporting by Soma Das in Bangalore, Antonita Madonna Devotta in New York and Eileen O'Grady in Houston; Editing by Marguerita Choy)